Overstock's Patrick Byrne battles New York Sith Lord

'I will not pay the Amazon Tax'

Unwilling to collect the Empire State's new "Amazon Tax," Patrick Byrne and Overstock.com have jettisoned their New York-based affiliate marketers.

Late last month, New York Governor David Patterson rubber stamped a $122bn state budget that attempts to collect an additional $50m in sales taxes from various online retailers. People call it the Amazon Tax, but it affects more than just Amazon.

Under the new law - which takes effect on June 1 - any e-tailer with New York-based affiliate marketers is considered to have a "physical presence" in the state, and that means they're required to collect sales tax on all goods shipped to a New York address.

Thanks to a pre-Internet-revolution Supreme Court case involving a mail order catalog business, physical presence is the litmus test for sales tax collection. If an e-tailer doesn't have physical operations in a state, then customers must declare purchases on their own - which few end up doing.

Amazon has since sued New York over the Amazon Tax, calling it unconstitutional. But while the case is pending, the company intends to obey the New York government. "Nothing is changing with regard to Amazon's relationships with Affiliates in New York state," Amazon spokeswoman Patty Smith told us. "And we expect to begin collecting sales tax (as the new legislation requires) no later than June 1, 2008."

Overstock has taken a different tack. As first reported by Shawn Collins and his Affiliate Marketing Blog, the Utah-based e-tailer will cut its New York affiliates loose on Tuesday, May 20.

"Unfortunately, due to the State of New York's new legislation, we now believe it's prudent to discontinue, temporarily, our current relationships with our New York affiliates while the battle over the constitutionality of the New York legislation is contested in the courts," reads a letter (PDF) sent to one New York affiliate, BusinessKnowHow.

Like Amazon, Overstock believes the new law is unconstitutional, but it can't afford to collect NY sales tax while the case plays out. "Amazon is challenging the law, and good for them," Patrick Byrne told us. "But we had two choices: Either raise our prices to New York residents or give up our New York affiliate business. And since our affiliates make up such a small fraction of our business, cutting affiliates made the most sense.

"Suddenly having to pay [roughly] 8 per cent tax on 10 per cent of our sales would be a really bad trade off."

You'll notice that Byrne sees no difference between collecting sales tax and raising prices. "When you collect sales tax, goods get more expensive, and people buy less," he continued. "A tax is just a government's price on a service. When you raise your price on something, people consume less of it. And New York is raising the price on the service it provides as a state, and we're exercising our right to buy less of that service."

Byrne estimates that Overstock's New York affiliates account for less than 1 per cent of the company's total sales - and maybe as little as a half of one per cent. So that's what the company's giving up while Amazon goes to court. Jonathan Johnson, Overstock’s senior vice president for corporate affairs, confirms that if New York's new law is reversed, Overstock will reinstate its New York affiliates.

Johnson also believes that Overstock's stance on affiliates will put added pressure on New York to change its ways. "We're sending a message to lawmakers that they've made a silly decision. They're hurting businesses in New York, causing people like us to turn those businesses off."

Of course, Overstock acknowledges it has only two large affiliates in the Empire State. The real pressure is coming from the Amazon suit. And you have to wonder if Overstock's stand has in fact weakened Amazon's case. Among other things, Amazon contends that New York's law was directed "at a class of one" - i.e. Amazon. But obviously, there's at least one other in Amazon's class. ®